Why emerging-market bonds will outperform

After the global investment market stabilized in February, the performance of emerging-market bonds has improved, indicating that capital is returning to the market.

In addition, China lowered the banks’ reserve requirement ratio last month to stimulate the economy.

The recent rebound in oil prices and the RRR cut in China are major positive factors supporting the emerging market bonds.

With the return of risk appetite to the market, credit assets in oil-producing countries like Venezuela, Ecuador, Gabon and Angola rose strongly.

Mauricio Macri, the president of Argentina, reached an agreement with holders of the country’s debt recently. It may result in the removal of 15 years of debt sanctions on the country.

As for negative factors, Ukraine now faces some political uncertainty because its minister for the economy, Aivaras Abramovicius, an advocate of reform, has resigned.

Meanwhile, Venezuelan president Nicolas Maduro announced an adjustment of its currency pricing mechanism, leading to a devaluation of the country’s currency and lifting the gasoline price.

In the short term, to maintain ample liquidity, Venezuela still faces big challenges and risks of social instability.

To deal with the changing market environment, we are prudent on credit assets with low liquidity.

Latin American bonds are more attractive than Middle Eastern and East European bonds in terms of valuation.

So, investors may overweight those bonds in their portfolio.

In terms of duration, investors may maintain heavy positions on bonds from Mexico, the Dominican Republic, Indonesia and Hungary.

We also added to the duration of bonds in Thailand, Malaysia, the Philippines and Russia.

We believe the future performance of emerging markets will be tightly linked to China’s economic development, the pace at which the US Federal Reserve increases interest rates and change in commodity prices.

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